Apollo Micro Systems IPO review (Apply)

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Review By Dilip Davda on January 4, 2018

Apollo Micro Systems Ltd. (AMS) is breaking the ice for main board IPOs in CY 2018. AMS is an electronic, electro-mechanical, engineering designs, manufacturing and supplies company. It designs, develops and sells high-performance, mission and time critical solutions to Defence, Space and Home Land Security for Ministry of Defence, government controlled public sector undertakings and private sectors. AMS's customized solutions are developed using common hardware and software technology IP’s which can be re-configured to suit the end application and domain requirements of end customer. The huge repository of knowledge and technology base that Company has developed since inception is a strong base to outperform the competition and be abreast in the market. This supports Company to constantly upgrade the technologies to meet present and futuristic requirements of its customers.

AMS offers custom built COTS (Commercially off-the shelf) solutions based on specific requirements to defence and space customers. The systems undergo various stages of approvals right from design, prototyping, functional acceptance, manufacturing and qualification testing. As the systems are exclusively developed for a programme, the developed systems enjoy proprietary status. Thus specially developed and approved systems have no competition. The company has its participation in several Indigenous Missile programmes, underwater electronic warfare, underwater missiles, surface to air missiles, nuclear missile programmes, surface to surface missile programmes, indigenous submarine programmes UAV’s long and short endurance, ships, space programmes. The solutions offered by it were used by r customers during development and user trials on account of which these solutions are qualified to be a part of supply chain in production phase. The defence and space solutions require expertise in advanced technology development and engineering knowledge to make the systems withstand harsh environmental conditions. AMS has proven track record of executing projects which are qualified in several programmes. The defence systems supplies can be broadly classified as On-Board Systems and Ground support equipment. On-Board systems means the electronic systems which are integrated On-Board a Weapon or a Vehicle (Vehicle could be a Missile, Aircraft, Ship, Submarine or Battle Tank) which are used for navigational requirements, on-board computation, instrumentation & control, telemetry, Payload acquisition and encoding, command & Guidance. Signal Processing, Seeker data processing, Height Analyzers requirement (Altimeter), Power Electronics to power the On-Board Electronics. Ground Support Equipment means any other electronics which are associated and communicate with On-Board equipment or other support equipment which are required for command control communication, Ground Checkout, Launch of Vehicles and other associated systems. Company offers both On-Board Systems as well as Ground support equipment. Company’s operations are based on higher working capital needs.

To part finance working capital and general corpus fund needs, AMS is coming out with a maiden IPO of (approx 5672727 shares at the upper price band) equity shares of Rs. 10 each via book building route with a price band of Rs.270-275 per share to mobilize Rs. 156 crore. Issue opens for subscription on 10.01.18 and will close on 12.01.18. Minimum application is to be made for 50 shares and in multiples thereon, thereafter. AMS has reserved shares for eligible employees up to 5% of the issue size. The company intends to offer Rs. 12 per share (approx 5%) discount to its employees and the retail investors. Issue is solely lead managed by Aryaman Financial Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Post allotment, shares will be listed on BSE/NSE. Average cost of acquisition of shares by the promoters is Rs. 8.64 per share. Since inception till March 2014, it issued equity shares at par, thereafter it raised further equity at a fixed price of Rs. 200 per share in June and November 2017. It has also issued bonus shares in the ratio of 3 for 5 in August 2009 and 6.9714 shares for every 10 shares held in March 2011. Its current paid up capital of Rs. 15 crore will stand enhanced to Rs. 20.67 crore (approx). Issue constitutes around 27.43% of the post issue paid up capital of the company.

On performance front, AMS has posted turnover/net profits of Rs. 72.88 cr. / Rs. 5.33 cr. (FY14), Rs. 108.77 cr. / Rs. 7.45 cr. (FY15), Rs. 159.53 cr. / Rs. 10.00 cr. (FY16) and Rs. 211.80 cr. / Rs. 18.57 cr. (FY17). For first half of the current fiscal, it has reported net profit of Rs. 7.11 cr. on a turnover of Rs. 109.47 cr. For last three fiscals it has reported an average EPS of Rs. 10.10 and average RoNW of 25.65% on an equity base of Rs. 13.71 crore. Issue is priced at a P/BV of 5.05 on the basis of its NAV at Rs. 54.46 as on 30.09.17. If we annualize latest earnings and attribute it on the fully diluted equity post issue, then asking price is at a P/E of around 40 which indicates at aggressive pricing of the issue. No doubt defence sector is set for a booming period under “Make in India” plans and this company set to reap the benefits. Being issue under Rs. 250 crore, its listing will take place in “T” group which will restrict speculative movements in near term. As per offer documents, its listed peers (though not comparable in toto) are trading at a P/Es in the range of 18 to 28. It has order on hand worth Rs. 97.50 crore as on 25.11.17. Enhanced local procurements for defense sector helped this company to post 39% CAGR in top line and 57% CAGR in bottom line for last three fiscals. Its average ROCE is around 27% plus for these periods.

On merchant banker’s front, this is the 22st mandate from its stable. Out of last 10 listings, 3 opened at discount, 1 at par and the rest at a premium ranging from 0.2% to 20% on the day of listing. However, this is the first main board mandate from merchant banker after long.

Conclusion: Investment may be considered in aggressively priced issue for long term as being first mover in the specific segment in defense sector, it may create fancy going forward. (Subscribe).

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